From periods of inflation to supply chain disruptions, economic uncertainty can be a big grievance to companies that are not prepared. To SMBs in particular, they can be seriously damaging. Cash flow management, which is all about keeping track of how much money flows in and out of the company, needs to be an integral part of a company’s growth strategy.
So how should CFOs handle these tough situations and counter their impact on their business and its profit margins? During difficult times, maintaining a healthy cash flow is more important than ever and this means better managing expenses and operations as well as cash inflow.
Here are a few actions to take to make sure CFOs and cash flow managers boost their small business cash flow management and maintain a positive cash flow during a downturn.
1. Review your cash flow forecast
During tumultuous times it is vital to be prepared and cash flow forecasting is the most important way of managing cash. Though it might sound obvious, it can often be overlooked. Companies can get caught up in the now and forget to plan for tomorrow. Forecasting allows you to predict and plan for the future.
Your forecast should identify assumptions about the future and take into consideration the best and worst-case scenarios of your company’s response to these assumptions. This methodology, called scenario planning, will help you ascertain control over uncertainty.
If you want your forecast to be accurate, you need to make sure your accountant is using the most recent figures available. The general practice is to forecast cash flows up to 13 weeks ahead but during times of crisis, it’s important to re-forecast more regularly to ensure accuracy and avoid overshoot. Updating your forecasts more often than usual will enable you to see even the slightest changes early on so you can react quickly.
If your company operates internationally, keep a close eye on your intercompany accounting. Because intercompany accounting is all about managing money that flows across various legal entities within a company, sometimes in different currencies, it can lead to data inaccuracies which then introduce errors in the cash flow forecast. Spotting errors early on will save you time and bad surprises down the line.
2. Reassess your operational costs
When difficult times set in, they can affect many areas within a company. That is why they are also the perfect opportunity to pull out your cash flow statements and look at your expenses to see where and how you can minimise costs.
As much as possible, you should get all teams from every department involved in thinking about optimising and reassessing cash flows when they make decisions.
As you review your cash flow statements, you may discover that your company has a few leaky buckets and that some expenses are putting a dent in your budget. Reassess your expenses and you may find that some are unnecessary, some can be replaced by cheaper alternatives, and others can even be avoided altogether.
Once you’ve reassessed your position, consider building up your financial safety cushion. Companies tend to have three to six months’ worth of operating costs set aside. To avoid any potential cash flow problems and to tackle big challenges like unprecedented pandemics and historic inflation, your company may need to consider setting aside a little more. While there is no one-size-fits-all answer and budgets depend on every company’s situation, we suggest setting aside nine months’ worth of operational costs to safely withstand times of crisis.
3. Review your supply chain strategy
Economic downturns, inflations, and increasing transport and raw material costs are usually good opportunities to reassess the supply chain from a cash-flow perspective. When struggling with international supply chain disruptions, there can also be benefits in looking for local vendors to ensure a smoother transport process and communication.
Changing suppliers is one thing, but you won’t be making a real difference unless you also negotiate your supplier terms. Start with your key suppliers as they’ll have the most impact on your cash flow. Things to focus on here include:
- Extending payback terms to keep cash longer and improve working capital.
- Looking out for minimum purchase requirements and negotiating volume discounts to help you save money in the long run.
- Keeping an eye out for cancellation clauses and penalties that could make you lose money unnecessarily.
Remember to review your supplier contracts carefully and to regularly research competition. You’ll be able to compare the prices and terms that suppliers on the market offer, identify those that may be offering discounts, and make sure you’re choosing the most favorable partners for your business.
4. Take on technology
Because filing out old-fashioned spreadsheets can lead to human error, inaccurate data, and multiple versions, consider modernising your processes by resorting to technology. Several tools can develop reports, calculate financial metrics and provide real-time insights for accurate forecasts. As a result, you will be able to predict more accurately, manage tasks more efficiently, and gain greater agility and resilience.
Invoice software and payment tracking options for example can help optimise cash flow. After all, sending out invoices sooner means receiving earlier payments, and knowing where payments are provides enhanced visibility for decision-making. Some tools also let you schedule automatic payment reminders.
Also, consider automating your own payments to avoid late payment penalties and adopting intelligent supply chain management systems.
By bringing together advanced technologies, big data, real-time information, these systems can objectively optimise decision-making.
5. Expand internationally
Whether in good times or in bad times, keeping all your eggs in the same basket is never a safe option. Focusing on only one country or sales channel can be especially limiting and dangerous in times of crisis. So why not consider exploring new opportunities by reaching out to new markets?
Expanding horizons is the natural progression for companies seeking to grow and a good way to make sure your company gains long-term sustainability.
Going international can be daunting but following a clear roadmap and setting achievable objectives will help you reach your goal. Check out our tips on the topic for ideas on how to get started.
6. Explore hedging options
In times of economic unrest, currencies can fluctuate drastically. If your business is an international one, you may be dealing with payments in foreign currencies. Beyond the fact that they could be costing you a lot in bank and transfer fees, they could be hard to forecast due to currencies fluctuating in response to the volatile economic climate. Consider turning to cash flow hedging strategies to limit currency fluctuations in the long-term and better anticipate your cash flow. By reducing your exposure to foreign exchange risk, you’ll also be reducing uncertainty and limiting losses.
The bottom line
In a volatile market, you can forget about the old saying, “business as usual”: you need to be able to make fast yet measured decisions. There will always be difficult times, but the best companies are those that can adapt rapidly and see challenges as growth opportunities. With the appropriate cash flow management and sufficient anticipation and agility, your company’s financial health can withstand any economic downturn!